Using an Agent or Distributor
Foreign companies wishing to sell their products in Indonesia are required to appoint an Indonesian agent or distributor pursuant to Ministry of Trade (MOT) Regulation No.
36/1977. The registration of an Indonesian agent or distributor with the Directorate of Business Development and Company Registration at the MOT is mandatory under MOT Regulation II/M-DAG/PER/3/2006.
Appointment of an Indonesian agent (or distributor) requires care, since it is difficult to get out of a bad relationship. Indonesian law allows the severance of an agency agreement only by mutual consent or if a clause permitting the severance is contained in the original agency agreement. A trial agency period of at least six months is generally written into agency contracts. As in many countries, the Indonesian agent’s network of contacts and personal power affects costs and ability to exit an unsuccessful bad agency agreement.
The services of an aggressive, active Indonesian agent or distributor can be an important means of expanding sales in Indonesia because they know the cultural minefields and systemic processes that foreigners need years to begin to master. Many Indonesian importers do not specialize in particular product lines, and represent multiple foreign manufacturers and product lines. Generally, however, large conglomerates establish discrete company units that tend to specialize around a product range. Medium and smaller importers tend to specialize in a narrow range of goods, but are not averse to adding a completely different product line if a profit can be foreseen.
It is generally advisable to set up agency arrangements with firms that handle a complementary range of products. These are not essential, however, since substantial sales can often be made by firms active in quite different product lines. An increasing number of firms identifying themselves as suppliers of “technical goods” concentrate on general industrial machinery and equipment. These firms often have engineers on their staff and are prepared to provide engineering assistance and after-sales technical support.
In many cases, foreign companies have established close connections with Indonesian importers, allowing the two companies to function as one. The Indonesian company acts as the importer and distributor, and the foreign company promotes its products, sometimes seconding expatriate staff to its Indonesian distributor/partner. A more active role for the foreign firm can be arranged through a management contract, which can take many forms.
Foreign principals often work out a management agreement that allows the foreign company in Indonesia to play a more active role in the marketing efforts of its Indonesian agent or distributor. In many cases, a separate agreement is signed between the expatriate personnel and their foreign employer to regulate this relationship. The tax liability of the foreign firm is limited to the income of the expatriates assigned to the representative office, while any other taxes are assessed to, and borne by, the agent.
Types of management agreements include: (1) technical assistance agreements; (2) management agreements; and (3) management agreements coupled with financial agreements. The technical assistance agreement limits the foreign firm’s function to providing technical assistance to the Indonesian company. The management agreement allows the foreign firm to manage the company or a division within the company. In the management agreement coupled with a financial agreement, the foreign firm also finances the Indonesian operation, either under the name of the Indonesian company or a division thereof. Remuneration to the foreign company can be in one of the following forms: (1) fixed fee; (2) commission; or (3) profit-sharing. Whatever basis is used for remuneration, it must be formulated clearly in the agreement, and it must comply with current Indonesian laws. To protect the foreign company’s interests properly, a bona fide and comprehensive agreement should be drawn between the parties concerned.
Establishing an Office
The Indonesian Investment Coordinating Board (BKPM) attempts to operate as a one-stop shop for investors. Recent reforms have reduced the paperwork process and delays in applying for the necessary government permits for foreign investments in Indonesia. A business permit issued by the appropriate government agency is required to establish an office in Indonesia. Depending on the nature of the business, several government agencies may be involved in issuing a business permit.
To open a foreign representative office in Indonesia, the firm must appoint a representative, who may be either an Indonesian national or an expatriate. A foreign representative office in Indonesia is actually more of a liaison office. Under Indonesian law, a representative office is restricted in the types of activities that it can pursue. For example, these offices are restricted to signing sales contracts, collecting payments, conducting trade activities and sales transactions, and participating in other related business activities. Prior to opening an office, however, the firm must establish itself as a legal entity by registering with the proper Indonesian government authorities. The process is as follows:
A letter of intent, a letter of statement, and a letter of appointment (indicating the appointed representative), from company headquarters on official letterhead, must be sent to the Indonesian Embassy or an Indonesian Consulate for notarization. A letter of reference from the embassy or consulate is also required.
The notarized letter of intent, the notarized letter of appointment, and the letter of reference, along with the resume of the appointed company representative and his or her Indonesian work permit (KIMS Card) must to be submitted. If the appointed company representative is an Indonesian citizen, a copy of his/her Personal Identity Card (KTP) needs to be submitted instead.
Regional representative offices, classified as serving two or more other ASEAN nations, can also be established in Indonesia. The regional representative office is limited to more of a liaison role and is restricted from participating in many business transactions.
Franchises facilitate the transfer of know-how and managerial expertise to the franchisee companies while simultaneously allowing the franchiser to quickly establish a presence in the country. Under a typical franchising agreement, the franchiser receives royalties and fees as stipulated in the contract. In exchange, the franchisee has the right to use (and manufacture) copyrighted, patented or service-marked materials identifying the enterprise. The franchiser typically provides training and organizational guidance in return for a guarantee that the franchisee will follow these operational directions.
With the release of the Government Regulation (PP) No.16 of 1997, the Indonesian franchise industry had–for the first time– foundation in Indonesian law. Then, the Government of Indonesia (GOI) replaced PP No.16 of 1997 with PP No.42 of 2007. This regulation came into force when the implementing regulation, Ministerial Decree No. 31/2008, was issued in August 2008. The new regulation sets a number of criteria that franchisors have to meet prior to selling their franchises. Although many local franchisors see the new regulation as a barrier to grow, the GOI argues that the regulation will set an industry standard and protect potential franchisees.
Indonesian law requires that a franchise agreement between a franchiser and a franchisee be written in Indonesian and subject to Indonesian Law. The GOI has limited the operation of large franchise businesses to provincial capitals. Only small and medium-scale enterprises, or licensed non-small-scale entrepreneurs, may operate franchise businesses in smaller cities or rural areas. This regulation was designed to insulate indigenous small and medium-size companies against competition from foreign franchisers, and to encourage local companies to develop their own franchise concepts.
The regulation obligates every franchise business to obtain a registration certificate, namely the STPUW (Surat Tanda Pendaftaran Usaha Waralaba or Franchise Business Registration Certificate), from the MOT. The registration should be made at least 30 working days from the date the franchising agreement, which shall be valid for at least five years, takes effect. The regulation further stipulates that priority should be given to the use of domestic goods and / or products as long as they meet the required quality standards.
Direct marketing is used in Indonesia to sell many kinds of products, from insurance to sewing machines. Companies such as Amway have built up large businesses by direct marketing through local distributors. Independent Indonesian companies have copied their methods with success.
Since 1994, the government has removed most requirements for domestic equity in joint ventures. However, foreign investors who opt for 100 percent initial ownership are suggested to divest to Indonesians at least some share, even as little as one percent, after 15 years. This can be accomplished through the stock market. In 2001, the President issued a decree regulating joint ventures for small and medium-sized companies.
As a practical matter, a local joint venture partner is often essential for success in this market, for the same reason that an active Indonesian agent or distributor has advantages over a foreign trade representative office. The choice of an Indonesian joint venture partner is critical for many reasons, especially for knowledge of the local scene and contacts, which are important for successful operations in Indonesia. A few experienced firms provide background, credit-type reports on Indonesian entrepreneurs and firms.
A partnership in Indonesia is difficult to dissolve. Consequently, the first choice has to be the right choice. Business sense is as crucial to any commercial endeavor in Indonesia as it is anywhere else; “contacts” alone, while important, cannot substitute for business skills in an Indonesian partner.
Because Indonesians place great importance on personal relationships and mutual understanding, partnerships tend to be based primarily on genuine accord, with the written contract playing a less significant role. It is therefore important that any agreement be well understood by both sides. A contract over which there are conflicting interpretations is certain to cause future problems. In any case, a soundly written legal agreement is strongly encouraged, despite the weakness of the Indonesian legal system for enforcing contracts.
In some cases, licensing arrangements for products/services are more cost-effective options for U.S. companies doing business in Indonesia, but firms should apply the same cautions recommended for joint venture partners.
Selling to the Government
Although it may be possible in some cases to sell directly to the government, there is good reason to use the services of an agent or distributor for the early stages of project development, delivery, installation and service needs. Traditionally, most government procurement decisions have been based on long-established relationships. This does not necessarily mean illegal payments are involved, but these relationships could exclude participants not well known in the market.
New-to-market U.S. firms need the careful advice of local representatives to avoid wasting time and money participating in a competition with a non transparent process. U.S. firms also need to be sensitive to the difficulty some Indonesians have in delivering bad news. For example, if your agent knows a tender is structured against your company’s interest, he may be reluctant to disappoint you with the bad news in advance. A close relationship with the agent is the best way to ensure frankness.
In February 2009, through Presidential Instruction (Inpres) No. 2/2009, the GOI issued new regulations which stipulate the requirement to use 456 kinds of local products (in 21 categories such as agriculture equipment, defense equipment, chemical, EPC services for electrical, electronics and telecommunication equipment) for projects owned by the government, state-owned companies, and Production Sharing Contractors. It is planned that the list of the local products will be updated by Ministry of Industry every six months.
On August 6, 2010, the GOI issued Presidential Regulation no 54/2010 to replace the existing Presidential Decree No. 80/2003 regarding procurement for government’s projects. In this revised regulation, foreign companies are only allowed to bid on government tender for projects with value more than Rp.100 billion for construction, more than Rp.20 billion for goods and more than Rp.10 billion for consultant services. The government, then, will use this revised regulation as a base to set up a Procurement Law.
For other sales to the GOI, U.S. firms should become familiar with the “Blue Book” or the “Green Book”, a listing of major projects identified by the GOI as essential to national development priorities. The document is published annually by the National Planning Agency (BAPPENAS) and constitutes the official list of projects that are open to foreign official assistance and other sources of external financing. Most of the projects listed in these books require “soft loan” (low interest rate) financing. The USG does not initiate soft loan financing, although the U.S. Ex-Im Bank can offer balance loans to match tied aid. Indonesia has rarely accepted offers that would displace other donor commitments made through the annual World Bank-sponsored Consultative Group on Indonesia (CGI). Ad-hoc soft loans offered outside the CGI may offer opportunities to use Ex-Im Bank balancing provisions. U.S. firms should also familiarize themselves with opportunities available through ADB, or World Bank-funded projects.
Distribution and Sales Channels
Indonesia’s businesses are organized along classic lines, with the full spectrum of agents, distributors and other intermediaries represented in the economy. Finding a stocking distributor can be a problem due to a general unwillingness to assume the carrying charges involved with warehousing. In addition, pervasive corruption, especially among customs officials, makes the use of offshore warehouses, especially in Singapore, attractive. Congestion, weak infrastructure and corruption often makes it very expensive to ship product long distances within Indonesia from a central warehouse.
Indonesian consumers, particularly from middle and lower-income groups, are sensitive both to price and to general economic trends (for example, interest rates). Thus, importers of U.S. goods and services here pay closer attention to pricing than to product quality and promptness in delivery, when making purchasing decisions. They will seek low-interest financing, particularly in the coming year.
Other key success factors for doing business in Indonesia are patience and presence. Companies that have made a commitment to the country by establishing an office, or some other significant presence, will be more successful in marketing their products than those that attempt to sell their product on annual whirlwind trips. Brand loyalty and name recognition are highly valued by the Indonesian consumer.
To summarize, foreign interests can engage in business in Indonesia in the following ways by:
- appointing agents and/or distributors,
- setting up a representative office,
- entering into technical assistance or licensing agreements, -forming joint venture operations, and,
- establishing a 100 percent foreign-owned subsidiary.